In a report released today, H&Q pointed to the sheer numbers of day traders bypassing traditional brokerages as the primary cause of change in the trading industry. The Internet and the emergence of online trading has enabled consumers to bypass brokers and conduct their own transactions--which will force brokerages to dramatically expand their services as well as reduce their staffs, analyst Greg Smith of Hambrecht & Quist said.
"There will be layoffs as humans are replaced by electronic automation," Smith said. "There is extreme pressure. The retail trader becoming sophisticated is not a good deal for a lot of people."
Smith points to Merrill Lynch's decision to offer discounted stocks--to compete with other Internet brokerages--as an indicator that the mainstream brokerage business is slowly coming to terms with the Internet as a required distribution channel.
In the report, titled "The Electronic Brokerage Industry: Fasten Your Seatbelts," Smith also cites the rise in the number of short-term investors and predicts that by the year 2000 there will be 80 million.
"With technology, people are trading more generally and working on a short-time strategy, more now than ever before," Smith said.
Smith also predicted that traders will come to expect to do all their financial transactions at one place. The companies that are able to effectively crossover to banking or mortgage lending will be best able to weather the shifts in an increasingly changing market. Moreover, tomorrow's successful companies will also possess "financial strength, management depth, and leading market share" Smith said.
"I think E*Trade, Charles Schwab, and TD Waterhouse Group are well positioned for the playing field of the future," he said.